Unstoppable force of clean energy transition not controlled by government policy

Political fighting over energy policy once again blew up in the week before Christmas but out in the real economy, customers, producers and regulators are forced to manage and respond to a system in flux.

While politicians trade insults and finger point, Australia's energy transition is racing along, so quickly in fact we risk a severe case of indigestion.

Australia is seeing a huge growth in the level of solar power. Fairfax

Yet the speed of change in what will be a decades-long process to switch to a clean power system is causing some headaches, not helped by the vacuum on federal energy and climate policy.

"This is a once-in-a-lifetime change in the energy supply paradigm," says Rick Francis, chief executive of Spark Infrastructure, one of the electricity grid owners coping with the fundamental shifts taking place at both at the generator and consumer ends of the network.

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Certainly if you look at what's planned, there's a lot going on.

An "impressive" 1-2 gigawatts of new large-scale wind and solar projects is being added every month to the development pipeline, according to consultancy Rystad Energy.

"It's clearly not being driven by policy, it's being driven by economics, commercial factors and also the corporate PPA [power purchase agreement] sector," says Rystad's global head of renewables, Gero Farruggio.

It's a different story for projects under construction. Farruggio points to projects stalling amid deteriorating economics, delays in grid connections and increasing wariness among investors over risks around construction and the country's increasingly constrained grid – thrown into stark relief by last month's shock collapse of engineering contractor RCR Tomlinson.

But even so, change rolls on. According to wind power giant Vestas, more than 1 GW of wind capacity was connected into Australia's grid this year, with double that expected in 2019. It sees wind capacity surpassing 8 GW in the next five years, theoretically powering 5.6 million homes.

What's happening in solar is even more spectacular despite a slowdown in the rate of cost reductions evident in 2017.

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Rystad puts the capacity of pending solar farms already with development approval almost three times higher than wind, with almost 330 projects in the pipeline in total, many more than needed to meet demand.

By using wind and solar power to run its pumping operations, Snowy Hydro effectively stores the energy to use when demand is at its highest. Photo: Bloomberg

It comes down to cost.

By 2016, wind power already was already more than 20 per cent cheaper than gas in terms of levelised cost of energy – a measure of the cost of generation – while large-scale solar was on a par with gas, with all lagging behind existing cheap coal generation, according to Bloomberg New Energy Finance.

Fast-forward 20 years and large-scale solar is forecast to be less than a third of the cost of gas and a third more competitive than wind, with both wind and solar easily beating existing coal stations.

Yet practicalities have to be overcome. The faster rollout of solar – with shorter planning, approval and construction times – is posing a challenge.

"The rollout of wind you would have said was more controlled, more manageable," Spark's Francis says. "You've seen a lot more solar proponents come to market and a much more scattered [approach] and that's absolutely causing challenges for the network companies as well as the market operator."

That points to coal plants potentially exiting the market earlier than their design lives would suggest, raising fears of the sort of price spikes seen in South Australia after the Northern generator shutdown, and in Victoria after Hazelwood.

Still, Brett Redman, the new chief executive of the country's biggest coal power generator AGL Energy, isn't contemplating the early closure of a generation source that he describes as the market's "backbone of stability" as it proceeds down the low-carbon path.

Redman says a planned and "manageable" transition path for emissions reductions will be important, whatever the colour of government.

"In the next few years AEMO [the Australian Energy Market Operator] has a job at hand to really work out how to bring all this new generation to the market," Redman says.

"We're clearly starting to see a few unexpected things come out, whether that's too big a concentration of renewables on one line or in a particular area or whether it's the phasing or timing of how these projects might appear. So there is a job of work to do there, but I think they are getting onto it."

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Renewable energy generator Infigen Energy shone a light on some of the issues this week, advising of a $9 million-$10 million writedown of its development portfolio, citing the "dramatic" surge in solar development in Queensland which has dimmed prospects for its own projects.

Constraints in areas of the grid, particularly in northern Queensland, have come to the fore this year, harming renewable project economics by cutting the percentage of a solar farm's generation that reaches the customer.

And while augmenting the network is central to the solution, major regulatory hurdles loom for new investments, with the impact of past "gold-plating" by state-owned utilities lingering on in today's power prices.

Certainly just how much is invested in the transmission and distribution networks will have an impact on how much consumers pay for power, given the actual cost of generation is only part of the final bill – about 34 per cent for households.

That – as well as policies such as green subsidies – make the nearer term direction for electricity prices less certain despite the longer-term thinking that more renewables in the system means lower wholesale prices, experts say.

Hence the importance of AEMO's Integrated System Plan, released in July, which underscored the importance of grid connectivity to support the transformation underway in energy supply at lowest cost.

As things inch forward federally, state governments have jumped in, with NSW, South Australia and Victoria launching their own grid initiatives.

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Spark's Francis is worried things are still moving too slowly.

"The time for action is really here," he says. "We will deal with it. The question is, are we going to deal with it in the most efficient fashion, so it's the cost of the transition ... and a lot of that comes down to the policy decisions."

The development of storage also gives hope for a more efficient and faster transition, with more proposed solar and wind farms now including an element of electricity storage than not.

"The level of investment in storage – be it lithium-ion or be it pumped hydro – is increasing and that is a potential catalyst for an acceleration of this transition," says Rystad's Farruggio.

"The level of storage that is required is less than most people expect to move to renewables and we are certainly seeing those levels of projects being proposed. The only determinant to when capacity is going to be implemented is the speed at which storage costs continue to decline."